All Russian blue chips grew in price over the year, especially GMK Norilsky Nickel – 220,38 % (21,97 % over 2002), Mosenergo – 114,79 % (–17,07 % over 2002) and RAO Unified Energy System of Russia – 112,36 % (–20,87 % over 2002). Such a substantial growth in Norilsky Nickel stocks was reflected by entering the global steel market and favorable export prices. The expected restructuring of the power industry promoted demand for electric-power companies, primarily RAO Unified Energy System of Russia and «Mosenergo. Surgutneftegaz – 81,40 %, Rostelekom – 66,67 %, LUKOIL – 49,07 % and Sberbank of Russia – 37,43 % declined slightly. YUKOS and Sibneft grew very slow against 2002 when they were leaders in growth. In 2003, stocks of these oil companies grew by 14,89 % and 28,33 % correspondingly. Among the «second line» companies were Chelyabinsk integrated iron-and-steel works (650,0 %), Yarenergo (609,19 %) and Nizhy-Tagil integrated iron-and-steel works (500,0 %), which showed the maximum growth in market value in 2003. However, the transfer quantity of the aforementioned three stocks remained relatively low, not more than 100 transactions during the year.

The RAO Unified Energy System of Russia resumed leadership in the RTS turnover, hence grew in share by 30,23 % in 2003 against 26,3 % in 2002. However, the share of LUKOIL declined from 19,31 % in 2002 to 17,87 % in 2003. Transactions with NK YUKOS accounted for 14,28 % (10,41 % in 2002), while the Surgutneftegaz remained unchanged, its share being 10,23 % against 10,65 % in 2002. GMK Norilsky Nickel is at the bottom of the list of maximum turnover leaders at the RTS, its share being 4,74 %. Thus, the share of the five aforementioned issuers at the RTS accounted for 77,35 % in 2003 against 72,18 % in 2002.

Figure 26

Blue Chips Market Value Movement in 2003

Source: RTS Stock Market.

As of December 31, 2003, five leaders in capitalization were distinguished according to the RTS market’s data: YUKOS – $28,76 bln US dollars ($21,04 bln US dollars in 2002), Surgutneftegaz – $20,76 bln US dollars ($11,4 bln US dollars in 2002), LUKOIL – $19,77 bln US dollars ($13,09 bln US dollars in 2002), GMK Norilsky Nickel – $13,94 bln US dollars ($4,3 bln US dollars in 2002), Sibneft – $13,5 bln US dollars ($10,5 bln US dollars in 2002). In 2003, LUKOIL stood down from the third place for Surgutneftegaz listed fourth in 2002 among most capitalized companies in Russia. It should be noted that oil and gas companies still represent a significant share in total capitalization of the Russian stock market. It seems reasonable to say that the growth in global oil prices was among the key factors responsible for such a significant increase in capitalization, which attracted instantly more investors to oil and gas sector. Thus, once again structural defects of the Russian economy and raw-materials-export orientation proved available. At economic sectors other than those related to raw materials, the Sberbank of Russia has the biggest capitalization (as was the case in 2002) which amounted to $4,99 bln US dollars ($3,63 bln US dollars in 2002) at year-end 2003.

Forward contracts market

In September 2003, the forward contracts market (FORTS) accomplished two years. It is noteworthy that this segment of the Russian stock market has been growing year to year. Over the period between January 4 and December 31, the total turnover at the FORTS (futures and options) amounted to $214 bln rubles, which is approximately 2,3 as much as in 2002. It should be noted that the total transfer quantity on options increased by 8,7, while on futures by 2,2. Traders carried out about 901 thousand transactions, which corresponded approximately to 34 ml contracts. For reference, the similar figures in 2002 were 546 thousand transactions and 22 ml contracts correspondingly.

The total quantity of open positions on standard contracts reached 2,335 bln rubles, 339 thousand contracts (1,191 bln rubles, 292 thousand contracts in December 2002) and grew by 96 % in terms of rubles and 16 % in terms of contracts at year-end 2003, December 31.

Future transactions accounted for a major share in forward contracts in 2003: over 94,4 % of the total transaction quantity (201,9 bln rubles), while options transactions amounted to nothing more than 12,1 bln rubles. Future contracts on market value of RAO Unified Energy System of Russia and NK LUKOIL remained most attractive instruments for investors. In particular, in 2003 their share in the total transactions accounted for 66,4 % and 12,9 % correspondingly. Two new contracts emerged at the market in 2003, option on OAO LUKOIL future contract as well as the first interest rate future on Moskomzaim bonds. All future contracts became sale and delivery except for US dollars and S&P/RUIX futures.

Corporate bond market

In 2003, the Russian corporate bond market was governed by upward trends too. Corporate bonds’ indices, which are calculated by Zenit Bank on the basis of MICEX corporate bonds’ quotes, grew noticeably at year-end 2003.

Several periods of upward or downward trends were most evident in 2003. A quick growth in Russian corporate bonds took place since early in the year till approximately mid-May, on 16th of May the ZETBI–Corp4 index reached its historical maximum of 113,65 points (grew by 108,39 % against the index value as of January 4, 2003), while the index of most liquid corporate bonds, ZETBI–Corp10, hit its maximum of 117,33 points (grew by 111,74 % against the index value as of January 4, 2003) on May 19.

The decline that occurred early in the year can be explained by macroeconomic factors: expectations of disinflation and further reduction of interest rates stimulated bull speculations, while a marked decline in par of dollar vs. ruble with better yield on ruble instruments stimulated a transfer of funds from the exchange bonds sector to the domestic bonds market. The inflow of currency earnings from oil export boosted liquidity at the banking sector and, as a consequence, an excess demand, which also supported quotes early in the year. In other words, it was the deficient revenues of debt instruments that became a key factor of such a quick growth. The situation went on till mid-March, when the number of investors, those who decided to realize their profit, grew significantly due to a favorable situation at the market and lack of primary offering. Thus, the market saw a marked decline for the first time since long: on March 20, ZETBI–Corp and ZETBI–Corp10 indices dropped to 109,69 and 112,11 points correspondingly (by 104,61 % and 106,76 against January 4, 2003).

In April, excess ruble liquidity effected bonds prices due to a stable inflow of foreign exchange to the country, which grew because of higher demand among investors. However, each upward movement was followed by some technical correction. Investors tended to generate more profit by investing in high-risk securities under the circumstances of declining redemption yield, which instantly boosted prices of the «third echelon» bonds. Early in May the redemption yield continued to fall. However, quotes began to decline by mid-May. It seems reasonable to say that a considerable volume of original placement and «overloaded» portfolios of major underwriters due to the auctions in May became the key factors, in spite of a favorable environment in the money market.

In June, the downward trend was finally strengthened due to an ongoing increase in volumes at the primary market, which was represented by a marked increase in corporate bonds yield. Quotes continued to fall between July and early in September: on September 18, ZETBI–Corp and ZETBI–Corp10 indices dropped to 107,7 and 109,59 points correspondingly (by 102,72 % and 104,36 against January 4, 2003). However, though only domestic factors influenced the market correction in the period between May and June, the impact was strengthened by an aggravation of external factors by July-August, primarily growth in political instability and uncertainty at the foreign exchange market. The majority of investors decided to realize their profit and withhold active transactions for the time being due to a decline at the stock market and increasing general instability. Low-liquidity instruments were most vulnerable at the market throughout the entire summer period, hence quotation on them was discontinued at the least market slump. In other words, transition to a new condition of equilibrium between demand and supply of corporate bonds took place at the market.

However, there was a turn in the bonds market in September. It is in September that investors received positive earnings after a long-term slump. Among the key factors that effected market movement in autumn were the YUKOS case, increase in securities offering and decrease in ruble liquidity at the banking sector. In October, the movement at the corporate bonds market followed generally the movement at other segments of the Russian financial sector. The demand was focused on most liquid securities, and nonresidents were major buyers. The reason they valued Russian corporate bonds was the spread to Eurobonds which was enlarged by 4 % to 5 % in mid-2003 and could compensate exchange risks, rather than the MBK level which represents liquidity at the financial sector. A quick growth early in the month resulted form the upgraded investment rating on Russia, but its effect was eliminated by further deterioration of political situation due to the YUKOS case. Further decline was stopped by low bond quotes which became attractive for some of the investors with uncovered positions.

In November, the corporate bonds market was inactive. Even the strengthened ruble and better liquidity could not boost the demand for securities due to the existing «political factor». A small upward correction at the end of the second week was short. The market was pushed down by selling in small volumes. Since late in November corporate bonds started to decrease with this trend being predominant in December. The growth was mostly encouraged by further strengthening of the Russian ruble, maintaining inflation within the scheduled 12 % and a fairly high liquidity at the banking sector. All in all, as of December 30, 2003, the ZETBI–Corp and ZETBI–Corp10 corporate indices were quoted 111,06 and 115,71 points correspondingly (105,9 % and 110,2 % against January 4, 2003).

As mentioned above, issuers’ activity in the primary market differed largely during the year. The maximum volume of placements at the primary market was registered in July and amounted approximately to 11,88 bln rubles, while the minimum one was 250 ml rubles, as was registered in January 2003. The total revenues of corporate bonds amounted to approximately 84 bln rubles in 2003.

Factors effecting Russian stock market

The Russian stock market in 2003 were governed by a set of factors which can be arbitrarily>

domestic political situation;

interactions with international finacial organizations;

international financial markets;

global raw material markets (in particular global oil market).

Each of the aforementioned factors differed in impact on movements at various segments of the Russian market in 2003. Therefore, the eimpact of each of these factors will be analysed in details.

Domestic political situation

It should be noted that the government’s commitment to the originally elected economic course had a positive impact on the development of financial markets, especially the Russian stock market. Favorable macroeconomic statistics rendered Russian stocks attractive for internal and foreign investors. However, in spite of macroeconomic stabilization in 2003, there was registered a substantial growth in political risks for investment in Russian financial assets. This was caused by the conflict between the government and leading Russian oil company YUKOS. The arrests of P. Lebedev and later M. Khodorkovsky were considered a fairly negative news for investors, which, as a consequence, resulted in further fall of securities. Criminal proceedings were instituted against major shareholders. The market responded to these events less negatively than late in spring and summer, but investors became more cautious in investment decision making.

Further growth in political risks was governed by the parliamentary elections in December 2003. The political party Edinaya Rossiya, which supports the incumbent President of the Russian Federation, polled the majority of votes. None of the Russian democratic parties could poll a 5 % minimum of votes required for election in the State Duma. The upcoming presidential elections became the final political factor which had an impact on the movement of Russian stocks at year-end 2003. In spite of the fact that the incumbent President is likely to be reelected and his is firmly committed to the program of economic reforms, the current relationships between business community and the government represent political risk since they give no way of forecasting for investors.

Interactions with international financial organizations

Interactions between Russia and international financial organizations developed successfully in 2003. Russia honored the debt liabilities in full according to the schedule. Obviously, the most significant event for Russia was the Moody`s decision to upgrade the sovereign rating on Russia. On October 8, 2003, the agency upgraded the sovereign rating on Russia from Âà2 to Baà3 on international bonds and all external RF Eurobonds, which corresponds to an investment grade. In addition, the agency upgraded the rating on ruble-denominated bonds up to Âàà3, and bank foreign exchange deposits from Âà3 to Âà1. The ratings on the tranches of foreign currency bonds of the so-called «Russian Era» (6th and 7th tranches) were upgraded from Âà1 to Âà3. The «Soviet» 5th tranche OGVVZ bonds was upgraded Âà2. The outlook is Stable according to all ratings.